Abstract
This paper aims to determine whether Exchange Rate instability of Pakistan, affects it’s imports, Exports, Trade Balances, Foreign Exchange Reserves and GDP of Pakistan or not, and if so then in what direction. We have used pooled data from 1952 to 2010 (on annual basis), indirect exchange rate quotations (Dollars per Rupee) are used. We have estimated our equation by running each variable at lag 3, Estimated equation of explanatory variables (Exchange Rate, imports, Exports, Foreign Reserves) for explained variable (GDP) exhibits a significant relationship, which is highly sensitive. A change 1 basis point in exchange rate can result in thousand of USD change in GDP. The depreciation of exchange rate has a positive impact on the exports, but sudden and abrupt fluctuation in exchange rates can disturb economic growth. We have used: Correlation Removal methods, Multi-collinerity Detection and Removal Tests, Stability Test, Granger Causality Test, Auto correlation Detection and Removal Tests, in-order to make our model and it’s variable, a “good predictor” for determining the Trade Balances of Pakistan, significant enough, for future predictions about GDP.
Highlights
Exchange rate is an important macroeconomic variable and a vital factor in international trade
We may find imports against the theoretical model, But for Trade Balance is significantly affected by Exchange Rate Instability, which can help in enhancing exports, and leads to the imports of those goods, which are productive in nature, which helps in increasing the Gross domestic product (GDP) of Pakistan
The depreciation of Exchange Rate has Positive impact on the Exports, i.e. it results in increasing the Exports of Pakistan, as a result helps in maintaining a Trade Balance
Summary
Exchange rate is an important macroeconomic variable and a vital factor in international trade. The variability in exchange rate plays an important role in the determination of trade balance. Exchange rate volatility can influence policy decisions, affect the volume of exports, imports and reserve money, and disturbs the allocation of productive resources and balance of payments. “Appreciation” of the exchange rate affects exports negatively and imports positively, “Depreciation” has reverse effects. Instability on Real exchange rate plays a vital role in determining the competitiveness of trade, real depreciation makes the home products cheaper in the world market, which Increases the level of Exports of a country. Abrupt changes in exchange rate is expected to have a significant negative impact on the imports of the Pakistan, because in a small developing country the importers play safe and cautious role than any other developed country because of less risk taking and resources limitations. Excess appreciation of exchange rate will yield negative coefficient of real devaluation whereas excess deprecation
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
